Would Free Trade Lead to Massive Outsourcing?

By Shaunvir Singh Oct 03, 2012
Would Free Trade Lead to Massive Outsourcing?

Is US Export Result of Free Trade and Greater Globalization?

In this article we ask the question, “Is outsourcing free trade?” The main consensus amongst leading US economists is that international free trade produces a win-win result for both parties and an overall net gain for society. This would thus lead to the conclusion that outsourcing benefits the US. The anti-outsourcing camp response however is that offshore outsourcing is not free trade; what is being traded when US employers outsource jobs out of the country? Is outsourcing free trade; does the US export “in return” for the import of outsourced jobs?

If free trade signifies the export of goods A for the direct import of goods B, (both unhindered by governmental restrictions), then yes the anti-outsourcing camp is correct in their assertion that outsourcing is not free trade. However, free trade is considerably more complex and intricate than the analogy of, “imports of goods A for the direct exports of goods B”. If one takes such a view, one will arrive to a misleading and inaccurate conclusion. To unveil the true dynamics of outsourcing and free trade, we must initially consider, “what does the US export as a result of free trade and greater globalization?”

A recent and notable US export to India is that of US consumer goods and services. India is a third world country, but with a population of 1.2 billion the country does comprise of an affluent upper class and a 350 million strong middle class. With a steady annual GDP of 7-9% this middle class will grow to 500 million in the not too distant future. The emergence and clout of India’s middle class is of great significance, for it represents new opportunity and investment for US firms.

Multinational US companies found in New York, London or Paris are now too present in New Delhi, Mumbai and Bangalore. Microsoft software, Coca Cola drinks, Ford cars, Apple IPods, Hollywood movies, Dell computers, Levi’s jeans are all sold to Indian consumers. The Indian middle class has embraced US products and services and is spending in significant figures. Furthermore, not only are US firms present in India, they too are dominating the Indian domestic market. Without an open market, the Indian economy would be closed to the US; thus denying US firms access to this rising, vast and powerful market.

US exports to India however do not cease at consumer goods and services. Since global competition is a two-way street, US companies also gain opportunities to win domestic Indian business and government contracts e.g. construction of roads, buildings and ports. Once again the enormity of this market is considerable and only accessible as a result of free trade.

The magnitude with which US companies have outsourced to India, has also brought the two countries closer together at the highest political levels. In turn the sale of US military hardware to India has increased in recent times. This was evidenced in March 2009, with the agreement for the sale of eight P-8 Poseidons to India, worth US$2.1 billion, (the largest military deal between the two countries).

As the anti-outsourcing camp asks what is traded when US jobs are outsourced to India, anti-liberalist Indians can thus equally also ask the mirror of this question. For every US company selling to the Indian consumer market, how many Indian companies are selling to the US consumer market? How many Americans purchase Indian produced cars, computers or software? Do any Indian construction companies build roads, ports or airports in the US?

As with the anti-outsourcing US view, such an anti-liberalist Indian perspective would too however overlook the bigger picture of free trade and globalization. For, although India may not export consumer goods and services to the US, India does nevertheless export by way of outsourcing.

There are thus two answers to the question, “what is traded when US companies outsource?” The short sighted answer is…nothing. There is no defined or concrete agreement which stipulates an export in exchange for the import of outsourcing. The more pragmatic answer to the question is however that greater free trade between the two countries gives the US access to previously closed Indian markets.

Whilst we cannot point to a specific defined trade agreement for exports and imports, there undoubtedly thus exists a trade. Should, India deny US companies access to Indian markets, the US may respond by prohibiting outsourcing. Should the US prohibit outsourcing, its plausible India would respond by denying US investment in India.

The nature of international trade has evolved, whereby it is not confined simply to a direct exchange or trade of one good for another good. International trade can reside even if the trade is unlinked, unintentional and not “written in pen.” This is the objective of open markets. There was no Indo-US governmental agreement to “trade” the outsourcing of US jobs for US access to the Indian domestic market. These events were both mutually exclusive and independent. However, this is the evolved face of international trade; an implied understanding that both parties will obtain gains and have access to each other’s markets, with respect to wherever each countries strengths and weaknesses lie.

Pre-1991, India implemented economic policies of isolation. This effectively denied foreign companies access to the Indian domestic market. India would not adhere to a position where India opened it’s market to the US but was unable to export to the US. Outsourcing is a crucial part of the “trade deal”, and moves to stop outsourcing would result in Indian economic retaliation against US exports. This is perhaps the most conclusive evidence that outsourcing is a part of free trade.

In conclusion, outsourcing is free trade. That an express export is not defined for the import of outsourcing, does not deny that a credible trade is in existence. What is being traded when US employers move jobs out of the country? The answer to this and the real question is, “what is being traded when US companies sell to India’s 350 million strong middle class?”


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